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Colonial First State Global Asset Management (including First State Investments)

PRI reporting framework 2016

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 03. Percentage of each incorporation strategy

03.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
97 %
Percentage of active listed equity to which the strategy is applied
3 %
Total actively managed listed equities 108.7%

03.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

Each team has a unique investment processes most of which have been developed over many years by our leading investment professionals.

Responsible investment practices are applied by each of these teams in a way which complements their investment processes and philosophy. Principles of stewardship and responsible investment are the common thread which tie our diverse investment capabilities together.

In order to maintain the high standards consistent with our ambitions and commitments, while allowing for the innovative and diverse approaches exhibited by our different teams, a strong governance framework around responsible investment is critical. 

In recent years we have begun to develop ESG themed investment funds led by our Stewart Investors team’s sustainability strategies. Development of these strategies occurs within our existing product development process.

03.3. Where assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

The Stewart Investors Sustainability Strategies are managed consistently with other investment strategies managed by the team, which have from their inception in 1988 integrated the consideration of ESG factors into investment decision-making through an investment approach which is focused on:

• Stewardship

• An absolute return mind-set

• Bottom-up analysis

• Long-term thinking

• Searching for quality companies

• Finding sustainable and predictable growth

• Strong valuation disciplines

The sustainability strategies augment this process by seeking to invest in the shares of those companies which the team believes are particularly well positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.

The team operates within and contributes to the broader Stewart Investors process which serves to strengthen both the traditional investment strategies and the newer sustainability strategies.

03.4. Additional information. [Optional]

We have a cluster munitions policy which prohibits investment in companies involved in the manufacture of cluster munitions. This exclusion is managed through pre and post trade compliance systems. As the only exclusion applied we have elected not to select ‘screening’ as our incorporating strategy.


LEI 04. Type of ESG information used in investment decision

04.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

04.2. Provide a brief description of the ESG information used, highlighting any differences of sources of information across your ESG incorporation strategies.

ESG information is obtained from a wide range of sources and incorporated into different teams’ investment processes in different ways.  In addition to the sources highlighted above there is an array of institutions who also provide relevant information e.g. the World Bank. IEA, IPCC, OECD etc.

Managing this flow of information is a significant challenge as we strive to ensure that investment professionals have the most relevant information. In order to achieve this an ESG information management project has been initiated which during 2015 made the following enhancements:

  • Finalised the integration of Sustainalytics and MSCI Governance Ratings into Factset, a data aggregation and investment analysis system used by a number of teams. 
  • Our Australian Proxy Advisor, Ownership Matters’ recommendations and special reports are also available through Factset
  • We have finalised the integration of Sustainalytics and MSCI Governance Ratings into our data warehouse ‘Eagle’. This is significant step that will allow us to perform portfolio level analytics for our listed equity portfolios. This will be used to provide reporting to investment team heads, and the Global Investment Assurance Committee and our RI Governance ESG Risks Forum. In the future it will also allow us to enhance client reporting. 

04.3. Indicate if you incentivise brokers to provide ESG research.

04.4. Describe how you incentivise brokers.

Each team has its own process for selecting and remunerating brokers. Four teams have an explicit process for doing so, while two remunerate on an ad-hoc basis, and one does not remunerate brokers for ESG research (it is our Indonesian equities team where brokers are not routinely producing ESG research). One of our teams has an execution only service as they are a passive investor. 

For those that have an explicit process this can take the form of panel reviews which include ESG criteria, voting by analysts or direct allocations for particular research.

One of our teams has an execution only service after they decided to unbundle brokerage from research to avoid conflicts of interests given that in bundled arrangements client funds are being used for broker research of questionable value. The team is now tendering for ESG research independently and paying for it from its own P&L rather than from client funds.  

We expect the unbundling of research from brokering to increase with a number of our teams considering their position. 

Stewart Investors have unbundled since 1 July as a first phase.

04.5. Additional information.


LEI 05. Information from engagement and/or voting used in investment decision-making

05.1. Indicate if your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

05.2. Additional information. [Optional]

ESG engagement and proxy voting is performed by the relevant analysts and portfolio managers not by a separate team. As a result analysis of a ESG issues which can influence an investment decision can also influence engagement and proxy voting activities or visa-versa. All investment teams either have a centralised database with ESG information or have a standard section of company reports which include their ESG assessments. 


(B) Implementation: Thematic

LEI 09. Types of sustainability thematic funds/mandates

09.1. Indicate the type of sustainability thematic funds or mandates that your organisation manages.

09.2. Describe your organisation’s processes for sustainability themed funds. [Optional]

The Stewart Investors Sustainability Strategies are managed consistently with other investment strategies managed by the team, which have from their inception in 1988 integrated the consideration of ESG factors into investment decision-making through an investment approach which is focused on:

• Stewardship

• An absolute return mind-set

• Bottom-up analysis

• Long-term thinking

• Searching for quality companies

• Finding sustainable and predictable growth

• Strong valuation disciplines

The sustainability strategies augment this process by seeking to invest in the shares of those companies which the team believes are particularly well positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.

The team assesses sustainability through three lens:

1. Sustainable Goods and Services

• Companies with a positive impact on society, environment, health

• Well positioned for shifting consumer preferences, regulatory headwinds, long-tail liabilities

2. Responsible Finance

• Purpose, license to operate, risk aware

3. Required infrastructure

• Infrastructure necessary to support long-term sustainable development

• Focus on environmental efficiency, operational performance, license to operate

The team operates within and contributes to the broader Stewart Investors process which serves to strengthen both the traditional investment strategies and the newer sustainability strategies.

09.3. Additional information. [Optional]


(C) Implementation: Integration of ESG issues

LEI 10. Review ESG issues while researching companies/sectors

10.1. Indicate if E, S and G issues are reviewed while researching companies and/or sectors in active strategies.

ESG issues

Coverage/extent of review on these issues

Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

10.2. Additional information. [Optional]

Six of the investment teams review of the significance of ESG issues, while one team does, and our smart beta team does not currently review or incorporate these issues into their company analysis due to the nature of their investment process. 


LEI 11. Processes to ensure integration is based on robust analysis

11.1. Indicate which processes your organisation uses to ensure that ESG integration is based on a robust analysis.

          Quarterly reporting to Global Investment Assurance Committee
        

11.2. Describe how ESG information is held and used by your portfolio managers.

11.3. Additional information.

Of the eight listed equity teams, seven use a centralised database, seven teams have a standard section of stock notes dedicated to ESG, and three teams maintain systematic records of how ESG information was incorporated into the investment decision-making process.


LEI 12. Aspects of analysis ESG information is integrated into

12.1. Indicate into which aspects of investment analysis you integrate ESG information.

12.2a. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

12.3. Describe how you integrate ESG information into portfolio construction

Three teams reported adjustments to valuation tools and two teams reported adjustments to income forecasts. Four teams do not make these types of adjustments but instead reported that it was implied or captured in quality assessments which influenced portfolio weights. For example one of our teams reported that:

"ESG analysis is integrated into our investment process through our quality assessment and ranking model. This model consists of 25 criteria that influence stock returns in general and infrastructure securities in particular. A score is assigned to each criterion. A lower quality score makes it harder for a stock to be included within the overall portfolio. ESG criteria account for 20% of the overall quality score."

While another reported that:

"ESG information is not explicitly integrated into fair value analysis. We regard each of the areas within ESG as broadly equivalent in importance and avoid investing in companies which cannot demonstrate that they meet appropriate standards or who are not making clear progress towards meeting them in the context of their operating environment."

12.4a. Describe the methods you have used to adjust the income forecast / valuation tool

Three teams reported adjustments to valuation tools and two teams reported adjustments to income forecasts.

Four teams do not make these types of adjustments but instead reported that it was implied or captured in quality assessments which influenced portfolio weights. For example one of our teams reported that:

"ESG analysis is integrated into our investment process through our quality assessment and ranking model. This model consists of 25 criteria that influence stock returns in general and infrastructure securities in particular. A score is assigned to each criterion. A lower quality score makes it harder for a stock to be included within the overall portfolio. ESG criteria account for 20% of the overall quality score."

While another reported that:

"ESG information is not explicitly integrated into fair value analysis. We regard each of the areas within ESG as broadly equivalent in importance and avoid investing in companies which cannot demonstrate that they meet appropriate standards or who are not making clear progress towards meeting them in the context of their operating environment."

12.2b. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

12.4b. Describe the methods you have used to adjust the income forecast / valuation tool

Three teams reported adjustments to valuation tools and two teams reported adjustments to income forecasts. Four teams do not make these types of adjustments but instead reported that it was implied or captured in quality assessments which influenced portfolio weights. For example one of our teams reported that:

"ESG analysis is integrated into our investment process through our quality assessment and ranking model. This model consists of 25 criteria that influence stock returns in general and infrastructure securities in particular. A score is assigned to each criterion. A lower quality score makes it harder for a stock to be included within the overall portfolio. ESG criteria account for 20% of the overall quality score."

While another reported that:

"ESG information is not explicitly integrated into fair value analysis. We regard each of the areas within ESG as broadly equivalent in importance and avoid investing in companies which cannot demonstrate that they meet appropriate standards or who are not making clear progress towards meeting them in the context of their operating environment."

12.5. Additional information.


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